Reason for a New Age

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    What you will expect to see here are discussions of politics and tangentially economics. This blog will do its best to present a rational look at the world of today, how the modern world came into place, and the issues that are currently being discussed in the public realm.
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Posts Tagged ‘minimum wage’

Libertarianism and Human Foibles

Posted by publius2point0 on 2010/04/11

The self-made man is a very impressive fellow. He starts from nothing, works hard, works smart, and he comes out on top.

Except that he didn’t.

If he made his millions in the stock market, he is beholden to the men who created the stock market to begin with. That he can communicate his thoughts is thanks to the people who invented the language. That he could get to work in a timely fashion was thanks to the people who invented the motor, the tire, and all of the other trappings of modern life. That he even survived past the age of 5 years old is a minor marvel, compared to most of human history. That he was allowed to rise out of poverty is thanks to the first people who said that intelligence and capability is not reliant on your parents position in the world, but on the individual.

All of this isn’t to disparage the fact that he has earned his millions by bringing something of great value to the modern world, but he would certainly be shortsighted to think anything other than that 99.9% of his success rested on the shoulders of other, similar giants.

The Libertarian generally is this shortsighted fellow. He thinks to himself, “I managed to climb to the top, everyone else can too.” Of course, that’s like saying that everyone can be special. In any competitive system, even if everyone gives it their all, you’re still going to have it that almost everyone is at the bottom of the heap. The important thing is to get the heap wiser, better, and faster than the old one.

The Myth of the Lazy

A common argument against any sort of government policy is that it just goes to support the lazy who don’t wish to work.

Since 1970, the poverty rate has held fairly consistently around the 12.5% mark (of the total population of the US.) Of those, only 10% will be homeless at any time in their life. 2/3rds of those who become homeless are mentally ill or have substance abuse problems (this is roughly an even split). Of those who do become homeless, 80% of the time it will be for less than three weeks, 90% of the time it will be for less than two months.

At any given time, about 48.5% of the population is employed or looking for work. Roughly 24.7% of the population is below the age of 18, 13% is 65 or older, though since the average age of retirement is closer to 62, the number of retirees is probably closer to 15% of the population (+6 million people). A further 1.8% are stay-at-home parents. Those who are on active duty in the military (which doesn’t count as “employed” in BLS statistics) comprise 0.5%, university students are 1.5% (downgraded from 4.75% since about 75% are also employed). 7.5% of the population are severely impaired physically, 2.7% have severe cognitive impairment.

What do all of these figures mean, you might ask? The only people of whom we can be absolutely certain are content to do no work and live entirely off of government handouts are the chronic homeless who are not mentally ill. Defining “chronic” as anyone who stays homeless for more than two months, this calculates out to (300m * 0.125 * 0.10 * 0.10 * 0.667 =) 250,125 people or 0.08% (8 out of every 10,000 people). But at most we can say that minors, retirees, and stay-at-home parents, soldiers, and university students don’t count as being “the lazy”. Adding these together with the employed and those looking for work, 92% of the population is proven to be not-lazy. While some of the disabled can work, not all can in any truly feasible way. An upper bound to the number of lazy in the US could probably be pegged at no more than 1%.

Ultimately, basing policy around “putting it to the lazy” is chasing a bogey man. It simply isn’t an issue.

The Secret of Success

Nearly everyone who is expected to work, in American society, does work. And, it’s probably a given that each one of them would rather be making more money than they are now. As stated before, even with everyone in competition, most of everyone will still be at the bottom.

To rise to the top, you really need a fair combination of:

  1. Working longer hours than others
  2. Ingenuity
  3. Being in the right place at the right time (AKA having the right idea at the right time)
  4. People skills
  5. Money handling skills

Of all of those, only #1 and #5 is really up to the individual. #4 can be worked at, but generally you either have it or you don’t (and to some extent that is true of #5 as well). But there are plenty of Mexicans who will tell you that working three jobs sweeping floors and scrubbing toilets can last you a whole lifetime without upwards movement. There are plenty of reclusive geniuses who will never rise from sitting behind a computer in a dark room, analyzing data.

Success is down to a lot of luck of genetics, upbringing, and where you happened to end up and when. You can kick at people to rise higher, but they can rise no higher than their level of ability. No purpose is served in trying to get anyone any higher than that.

Family, Education, and Success

If you compare the integration of African Americans into the American pay ladder to that of, for example, the Chinese, you will find that the Chinese are winning and have become more or less fully integrated. And yet, the Chinese have been in the country nearly as long as the blacks, and were still treated as an inferior class up until the 70s. Assuming that there is no genetic weight that keeps African Americans from succeeding, then we must assume that the issue is cultural.

If a person is taught, as a child, that banks cannot be trusted, that “the man is out to get them”, and so on, that person tends to not work hard in school, to turn to crime, or to waste all money that he earns on bling. If you feel that you cannot get ahead no matter how hard you compete, you will not get ahead. It might be foolish, but there is plenty of evidence to support this. Among other things, I recall reading surveys of children in Japan who had turned to bullying. The common factor of all of them was that they felt that they had no future. Or, for example, if you look at the average earnings trajectories by educational attainment, you will note that there is a very strong correlation.

The Libertarian World

To simply state the basic view of the Libertarian, it’s that you should get what you have earned by your own hand, no more and no less.

Financially speaking, this must irrevocably lead to a class society. In areas where land is cheap, the poor will gather, and with their meager wages they will hire the worst teachers for their children. Those children will have no belief in their own prospects and very few will strive to succeed. The wealthiest will gather into the areas where land is the most expensive, hire the best teachers and tutors, and their children will stay at the top because there is no one else to take their place. A Libertarian might say that they would let their children rot as they will if they expended no effort of their own, but I think the real world shows that parents nearly always try to do the best by their children as they can.

While each of us may deserve what we have earned, our children simply don’t. Attempting such is detrimental to society in the long run. As it is now, 80% of the wealthy were not born wealthy. That’s a good thing, it shows that the people who are capable and have amazing ideas are able to rise and implement those ideas.

It’s a truism that life is better for the poorest of today than it was for the wealthiest of a hundred years ago. The iPod you have now would not exist if society was 50% slower at creating new technologies. It may be a cheap trinket that everyone in the nation can reasonably purchase now, but at the 50% the pace, we’d still be in the 1960s. That iPod wouldn’t exist if it wasn’t for the multitude of people who were able to rise up from the bottom, get into a nice school, and make it in the marketplace. Stifling that for the sake of grandiose ideas, in end result, makes your life worse.

Each person should get what he earns, but even the guy at the top earns the most when every child can start from an even standing. That is far more true to the ideal of Libertarianism, in fact.

Taxes and Feasibility

Jane is walking along through the hills and plains of Hawaii and she comes across a farmer named Rudy. She watches him work at his farming for a moment before interjecting, “Excuse me but why are you doing that?”

Rudy looks up at her querulous, “This? I’m milking.”

“Yes but, why are you pouring the milk into that coconut shell and then back out after each time you milk the cow?” She asks.

“Ah. Well, I figure that I have to work just as hard to see to it that this here coconut palm continues to provide as I do for this cow. So, you know, it deserves to give me just as much milk.”

“A coconut doesn’t make as much milk as a cow….” Jane replies with consternation.

“So that’s why I’m doing this.” Rudy smiles and goes back to his work.

To a large extent, people are like a gravity well for money. Some can hardly keep it without it flying back out, while as others simply continue to pull and pull it in. Part of this is to do with ones ability to climb the ladder, but mostly it’s a question of money management. The poorest people are the poorest people not because they don’t work hard enough — they work a 40 work hour work week just like anyone else — but more because they have poor money management skills.

I can offer two items of evidence for this.

Here is a chart that compares the median income (horizontal) of each state by the mean (vertical):

To explain the difference between median and mean, for those who aren’t aware, say that we have the following salaries:

$7, $7, $7, $7, $8, $8, $9, $11, $20

The mean is calculated by adding these nine values and dividing by nine: $9.33

The median isn’t calculated. You simply list everything in ascending (or descending) order and choose the value in the middle: $8

You will notice that the median is a lower number than the mean. When the distribution of values is fairly even like this:

$7, $8, $9, $10, $11, $12, $13, $14, $15

Mean: $11

Median: $11

The two values are similar or the same. When one end of a distribution of values is “fatter”, the median will vary that direction. When the distribution is evenly arranged, the median will line up with the mean.

In the above chart, the states are each given a different color. Red states are those which have no minimum wage. Gold are those which have a lower minimum wage than the Federal, blue those which have the same minimum wage as the Federal, and green is those who are above.

For a minimum wage to boost the wage of those at the bottom, it must take that money from the top. Generally, more money is taken from the top top than the middle top, and more is taken from the middle top than the lower top, and so on. In a location where the minimum wage law is raising the actual minimum wage from whatever it would naturally be according to the free market,  you would expect to see that the median income would be closer to the mean — in our graph, this means further to the right. And you would expect that locations where the minimum wage law was having little or no effect on the natural distribution of wages — for instance, where there simply was no such law — to have a lower median. That is to say, you would expect to see a curve. Instead, the ratio of median to mean is quite linear regardless of what their laws are.

So like I theorized in my previous discussion of the minimum wage, such a thing isn’t needed because people don’t take a salary less than they need to survive.

People who can manage their money well, however, do not just plan for immediate survival. They need a wage that can support them through retirement. As I pointed out in the discussion of the minimum wage, every state’s minimum wage is far too low for that. And since we know that the current minimum wage, as I’ve just demonstrated, is the same as the open market minimum wage, this means that your average minimum wage worker is accepting an irrational wage.

Now you might say that most minimum wage employees are high school students or people working their first job right out of college. If you look through the previously mentioned census report which tracks average income by educational attainment (see, specifically, Figure 4), you will notice that for anyone with an Associate’s Degree or less there is only a minimal increase in income from the start of their career to the time they retire. Whatever your starting salary was, you are more-or-less stuck with (on average). Adjusting my estimate of the lifetime average income necessary for self-sufficiency to 1999 dollars, it would be about $25.5k. Your average non-high school graduate (13.4% of the population) does not make enough money to be self-sufficient. Your average high school graduate (31.2%) is generally self-sufficient, but many are not. To take a wild guess, let’s say that half of the first and a fourth of the latter do not make it. This would be 10.6% of the population. Adding a little change for those who fall from greater heights, let’s make it 11-12%. Given that the poverty rate is about 13-17%, but does include high school students working their first job, etc., this number seems fairly plausible.

Let’s look at our second piece of evidence, where we examine the spending habits of the poor:

~47% of households where the combined household earns less than $25k per year spends about $1080 on gambling per year. Of course, we are talking about self-sufficiency not household-sufficiency, so we must include everyone up to not quite $50k per year and factor for a household being two people. We’ll guesstimate that out as 25% of individuals spend $2000 per year on gambling. On average, a poor person will spend about $1000 per year on alcohol.

The average poor person owns a three bedroom house with a patio and garage. Most of them are overweight.

The point here isn’t that they are sinful and have bad habits, it’s that someone who isn’t earning a wage that can be considered self-sufficient presuming a person who does little more than go to work and come back home right after and stare at a blank wall for entertainment can’t afford to buy $1000 of beer when he has water on tap for less than 1¢ per gallon. He can’t afford to purchase a three bedroom house, he should be living barracks style with two or three other families. This is how he is able to save up and support himself through retirement at his salary. If he wants beer, a roomy house, a non-working spouse, etc. he either needs to live the life of an ascetic, or he needs to demand a higher salary.

Like I said, the people at the bottom have poor money management skills. This is why they are at the bottom.

If you were to raise the minimum wage to be a meaningful number that matched the actual needed income, I see no reason to think that this would help the situation. If you were to drive through the poorest area of town throwing money out the window, you would see people driving around in cars with giant speakers a week later, not people setting up a retirement fund. Giving money to someone who is almost certainly useless with money serves no purpose. It creates jobs in the sense that there are more casinos and more car modification shops, but those jobs are coming at the cost of jobs researching cancer or developing the next thing after the internet. All money creates jobs. It’s only a question of where that money serves the best purpose.

Now, the presumable Libertarian response to this would be that even so, this is their right. If a person wants to waste all of his money and be destitute the moment he retires, he has every right to die of famine a month later. It’s the future he chose.

But you’ll note that I didn’t title this section “Why Libertarians are Wrong about Taxation”, I titled it “Taxes and Feasibility”. Personally, I’m perfectly fine to let someone choose a future where they have no retirement plan. But, that’s not true of at least 50% of the nation. I suspect that it would not be true of 80-90% of the population once there were millions of poor elderly men and women dying of starvation every year. Emergency legislation would be passed to prevent this from happening, and taxes would be imposed to raise money for it.

Rally against social programs all you want, the simple truth is that you aren’t the emperor. In a country ruled by the ballot not the king, only solutions that have any hope in hell of getting passed are feasible.

It is a simple truth that you, as the government, will have to raise money for social programs. That money will cost a certain amount, and nearly all of it will go to the poor. If you tax those poor to raise that money, that money just goes straight back to them. If you tax only the wealthy, there isn’t enough of them to afford it even if you taxed them 100%. As the government, your only feasible solution for raising this money is to go where the money is. If 10% of the people have 90% of the money and you need 40% of all money, like it or not, that’s where you have to tax from.

But the more important thing to realize is that when you tax the poor, all that’s doing is raising their wage, which is lowering the wage of those above them. It’s the same as the miniature story at the start of this section where the man takes the milk from the cow to give to the coconut, just so he can take it away again. It simply wastes effort.

And you can’t say that he should get two cows because even among cows there’s going to be those who produce massive quantities of milk and those who produce less; this may or may not correlate to how much effort they are to raise. The only question is whether they are producing enough milk to pay themselves off. If they do, you’re still better off to expend that energy getting their milk than to get rid of them. It might only be +1 gallon of profitability for that cow each week, where others get +8 gallons, but that’s better than zero.

If you would advocate that anyone who finds a market sustainable job, works 40 hours a week, and continues to work from young age to old, then he has been a net positive in society, then looking at the wage he made is a false metric. How much a person produces, how much he earns, and how good he is at saving money are unrelated values. Nikola Tesla invented AC power and the first major electric power generator and yet lived most of his life destitute because he just kept giving everything away for free. He deserved more, but he was an idiot in his own special way.

When a person accepts money from social security, medicaid, or medicair, he almost certainly earned it. It’s simply a matter that instead of being given his salary when he earned it, he is given it at a later point when he needs it. In the meantime, that money can be invested by those who are wiser in things of more value than casinos and speaker systems.

When you keep taxes low or non-existent on those with the lowest wage, it also makes it easier for small, startup businesses. They could pay all employees, manager or not, a more-or-less similar wage so that they can afford the people they need. But practically speaking, you have to be able to offer at least somewhat competitive wages for those in management if you want to be able to find anyone worth having, which means you have to pay the grunt workers the minimum that you can to afford it. The lower that is, the more readily you can run your business.

And it also makes it easier for Americans to compete against illegal immigrants, since a legal worker who is paying taxes is more costly than an illegal who does not.

While there certainly is the argument to be made that allowing people to screw themselves over, for people to have to pay their own way, etc. everything still ultimately comes down to two things:

1) It will never happen.

2) No practical good would come of it beyond the smugness of having won, if that’s the policy you wanted.



Posted in Editorial, Research, Theory | Tagged: , , | 1 Comment »

The Minimum Wage

Posted by publius2point0 on 2010/02/20

For the sake of clarity, let’s say that the philosophy behind the minimum wage runs as such: A person who can find labor, works 40 hours a week, and produces something that sells well enough to maintain a solvent company, is being treated unfairly by that company if he is not making at least enough money to support himself.

This does seem fair enough. Our fellow is working at least as hard as anyone else. He’s not lazy, and he’s not working to create something that no one wants. If the company can’t afford to pay him enough for him to survive and still stay in business, that business either isn’t creating anything of sufficient value as to not be a drain on society, or the money is being horded at the center.

For instance, let’s say that we have a company which manages farms. It has ten employees (including the boss), but only produces 5 food units per day–less than is needed to support even the company’s employees. If each employee earns only 0.5 food units, he’ll starve to death. If the boss of the company pays himself 1 food unit, paying the others all ~0.45 food units, they’ll still starve, while he at least lives. In either case, the government needs to step in and support the workers, which means they must force others to trade (i.e. be taxed) against their own survival, for something which doesn’t produce anything of sufficient value to support the survival of anyone. That’s just a drain on the economy.

But say that the company does produce enough food to be worthwhile, say 10 food units exactly. If each employee makes exactly 1 food unit, the company is not a drain on society and so can be considered to be free to do whatever it wishes. If the boss decides that he deserves to make more than his employees, however, he must necessarily make them go below the below the rate of survival. Here we are left with a company which can be self-sustaining, but is choosing not to be, even though all of its employees (including the boss) are guilty of choosing a profession that is just on the edge of survival. Assuming that the government will indeed step in, using taxes to keep those workers alive, this company is still creating a drain on society by forcing the government to hire more tax collectors or to have more people manage registering and tracking those in the welfare net, all for the sake of one man who wants to run a business that can barely survive, but isn’t willing to take the personal sacrifice to keep his business afloat naturally.

But of course whether something makes sense logically and works perfectly on paper is of no consequence if it is not operating as intended in the real world.

Mankind is Shortsighted

There is one singular issue with the minimum wage, which is that human are shortsighted (on average). Past scales of the next year or so, we really aren’t very good at planning. Most likely it simply wasn’t an ability that was useful when we were still swinging on vines, and spending time thinking about it simply distracted from immediate worries in a negative and dangerous way. Regardless of the reason, it’s almost certainly so.

The minimum wage varies by state, some not even having it, but a good modern day average would be the Federal minimum wage at $7.25 per hour.

Let’s take our ideal cheap liver, named Richard, who works for minimum wage. He is willing to live with a roommate or 5, he uses the bus, he goes without TV, radio, books, or anything beyond the exact minimum he needs to survive. We’ll say that he finds an apartment for $300 a month, he has a $50 a month bus pass, purchases $250 worth of food, and has $100 in utilities and other minor fees. Theoretically, one can survive on $700 a month. At minimum wage, he will earn about ($7.25 * 40 * 52 / 12 =) $1256.67 per month, but minus taxes we’ll say that it’s more around ($1256.67 * 0.65 =) $816.84. This is perfectly enough to survive and still have extra money for emergencies or TV or whatever.

But, remember our salary needs to cover the basic expenses of survival for our retirement and our childhood as well–or we’ll have been a drain on society. The question isn’t whether we can survive from age 18 to 65, while we’re working, but whether we can survive from age 0 to 78.

With that extra $180 a month, working for the 48 years of age 18 through 65, Richard will be able to save up ($116.84 * 12 * 48 =) $67,299.84. His survival expenses for his childhood plus retirement is ($700 * 12 * (78 – 48) =) $252,000, i.e. not enough.

For a 78 year life, the national average, at $700 a month, we must earn a total of ($700 * 12 * 78 =) $655,200. With only 48 years to earn this sum during, that becomes a minimum hourly wage of ($655,200 / 48 / 52 /40 /0.65 =) $10.10. If we didn’t charge him taxes, of course, that 0.65 disappears from our calculation, and instead we only need a minimum wage of $6.56.

But, actually, we haven’t included medical costs. The average American costs around $6000 a year in health bills (mostly incurred at the beginning or end of our lives). For a 78 year life, this adds an extra $468,000. Doing that math over, minus taxes, Richard needs to earn ($1,123,200 / 48 / 52 /40 =) $11.25 an hour. We’ll assume that the taxed portion goes towards paying that $6000 a year health value plus his childhood and retirement needs.

Apparently, the US average minimum wage is $4 too low to accomplish its philosophical purpose. Many many companies are either acting as a drain on society, or are paying their employees an unfairly low value.

The question becomes, why is the US government requiring this random value of $7.25?

The most likely answer is that they are simply pegging the minimum wage to what the market minimum already was.

You see, you don’t really need to establish a minimum wage if people are already looking out for their own survival. If a company is only offering me half as much money as I need to survive, I don’t go to work for that company. Simply human sanity, theoretically, results in the same result as the law. And so, there will already be a market minimum minimum wage, based on what people think they need.

The problem is, is that most people simply look at their monthly income and monthly expenses, and finance based on that. They don’t plan ahead for their children’s birth and schooling, and they don’t plan ahead to their retirement. This means that they accept enough to survive in the moment, and subsequently, the market minimum wage gets set to that value. This leaves the government in a quandary. They can either simply make sure that the market minimum is at least the true minimum, to save people who don’t have basic human sanity, or they can establish a true minimum wage $4 higher per hour than the market minimum, possibly putting significant percentages of companies out of business as well as raising the bottom bar for wages that must be paid by small, start-up businesses, before they become self-sustaining.

Ignoring the issue of small, start-up businesses, we could say that certainly it would be bad for the government to immediately raise the minimum wage by $4, but it could raise it gradually over the course of several decades. But the problem then becomes that the sort of person who lives on minimum wage is generally not the wisest user of money. Given extra cash, he will most likely squander it, buying excess alcohol, a big speaker system, go to Vegas, etc. He won’t use that money to save up, nor will he invest it in new industries or some other useful pursuit. You can raise his taxes so that he is left with only enough to support himself day-to-day, but then you’re still charging every business $11.25 per hour for their lowliest employees and thus raising the bar on starting a new business.

New, smaller businesses must run near or under the rate of survivability for some time–possibly years. And unfortunately, the idea that the boss makes more than his employees is sufficiently set in society that even if the president of the company is willing to work for minimum wage, if he wants to hire any further managerial staff, he will have to pay them more than that.

Ultimately, by fault of the majority of the nation, you’re stuck supporting people through retirement, through childhood and schooling, regardless that you shouldn’t need to. Trying to avoid having to set up the overhead costs of managing this social net becomes silly. You’re just as well to set up a minimum wage that really is only for day-to-day survival. Any more than that and you are financing lottery tickets and alcohol. But you’re also better off not taxing that person at all. This simply raises their wage to no positive effect.

I suppose you could say that the added value caused by taxation balances out to counter those companies that aren’t making enough money to survive, but personally I’d say that the market can figure that out on its own sufficiently well that hindering small businesses isn’t worth it.

If we only needed to survive from week to week and we weren’t being charged taxes, we only need to make about $700 a month. Just to handle emergencies, we’ll raise that to $750. This would be only ($700 * 12 / 52 / 40 =) $4.04 an hour. I think you can appreciate that this would be a boon to the small business.

You might say that this value would simply be offset onto big business, but the truth is that all taxes eventually come down on those who have the money to spare. If someone isn’t making enough to live, you tax him, give that money straight back, and then tax another person to make up the amount the person is still deficient. If you never taxed the first person to begin with, you only need to tax the richer person at the same value as you did before to afford it.

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